Mumbai: This year has been harsh for investors in the stock market, buffeted by worries over the impact of the US credit crisis, inflation that reached the highest in 16 years on the back of a surge in commodity prices, rising credit costs and slowing consumer demand.
The Bombay Stock Exchange’s benchmark index, the Sensex, has fallen 28% since the start of 2008 after delivering returns of 45% in each of the past two years. Investment in mutual funds fell to Rs5.44 trillion in August from Rs5.48 trillion in January. And overseas investors have pulled out a net $6.94 billion (Rs30,813 crore) from Indian stocks this year after pouring in more than $17 billion last year. On Friday, the Sensex declined 415.27 points, or 2.79%, to close at 14,483.83.
Turbulent times: The Bombay Stock Exchange building. Overseas investors have pulled out $6.94 bn from Indian stocks so far this year. Madhu Kapparath / Mint
However, this may not be the time to sell out, according to money managers who are advising investors to hang in there. The market is close to reaching bottom, from where it can only ascend, they say, as commodity prices start to decline.
“Our advice to investors who have a reasonable allocation in equities is to stay invested,” says Sandip Sabharwal, chief investment officer (equity) at JM Financial Asset Management Pvt. Ltd. His picks: capital goods and engineering, financial services and technology.
Investment in capital goods and engineering stocks is a play on India’s long-term growth prospects as is the financial sector, with interest rates set to peak, Sabharwal says.
Technology stocks should benefit from the rupee’s depreciation, a slowdown in wage inflation and the global economic downturn that may prompt companies in the West to outsource more work to low-cost India.
The sectors to avoid? “We are negative on commodity stocks like cement, oil and gas and steel since prices are going down,” says Sabharwal.
And what should be the selling strategy? “The need for a selling strategy should be contingent on investors’ requirement for money,” Sabharwal says. “The longer the horizon (of holding on to stocks), the more is the compounding of equity. If you need money, you need to plan for it systematically.”
Protect your money
Shankar Sharma, vice-chairman and managing director of brokerage firm First Global Stockbroking Pvt. Ltd, who has predicted that the Sensex could hit the 10,000 levels, remains negative on equity markets globally, but favours some selected sectors.
“It is not very easy to make money in this market. All you can do is to protect your money,” says Sharma, known to be the closest India has to a stock-market bear. “Right now, we would advise investors to put 70% of their money in fixed income securities,” he says.
Sharma advises investors to opt for so-called fixed maturity plans, essentially debt schemes offered by mutual funds that invest the entire corpus in fixed-income securities.
He picks drug makers and information technology firms as potential beneficiaries of a weaker rupee that should boost export revenue while banks would gain from a let-up in inflation and interest rates.
Oil refiners such as Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd will benefit from any decline in oil prices, which Sharma predicts will settle at near $80 a barrel after hitting a record $147 in July.
“However, over the next year other events such as politics (general elections) will put an automatic cap to the markets,” Sharma says. “Even over the next one year, we would advise investors to put money in the equities side only to the extent of 30-40%. “
A clutch of state assembly elections before this year ends will precede parliamentary polls due to be held by May 2009.
Inflation is expected to slow to 7% around March as oil prices settle at lower levels, says Gopal Agrawal, equity head of Mirae Asset Global Investment Management (India) Pvt. Ltd
Investors shouldn’t shy away from equities, Agrawal says. “Equity is an asset class that is bound to outperform all other assets class in a long run,” he says. For the risk-averse, he advises systematic investment plans that help people save regularly, limit losses and tide over market ups and downs.
Agrawal recommends agri-themed stocks including sugar, rice, agrochemical and fertilizer companies, renewable sources of energy, banking and capital goods sectors. Those he would avoid are automobile firms and real-estate companies. Puneet Nanda, chief investment officer at ICICI Prudential Life Insurance Co. Ltd, sees the Sensex moving in a range between 13,000 and 16,000 in the near term on volatile inflows and outflows of funds in event-driven trading.
In the long term, he says, the fundamentals will assert themselves. “With 7-8% gross domestic product growth and sound corporate earnings growth, markets are bound to do reasonably well on a long-term basis. An investor can look at an annualized return of 13-15% over a period of 5-10 years,” Nanda says. He advises investors not to time the market. “Markets can never be timed,” Nanda says. “So an investor should always keep some goal or horizon to sell out his stocks.”
Investors should be clear about their goals and risk appetite and identify the right mix of debt and equity in their portfolio, buying and selling regularly to maintain balance. Nanda counsels investors to opt for diversified funds.
“As it is difficult for a retail investor to pick a particular sector that is likely to do well consistently, investors should go for a diversified portfolio,” he says, declining to talk about specific sectors or stocks citing his company’s policy.
C.J. George, founder chief executive officer of local brokerage Geojit Financial Services Ltd, which is now part of the French bank BNP Paribas, favours infrastructure stocks that are now available at a huge discount to their price early this year.
“Once interest rates peak out and the global sentiments turn positive, these stocks will be the first to rally,” he says.
Nesil Staney contributed to this story.